Centre’s tobacco tax rejig to take effect from Feb. 1

Why in News ?

• The Union Finance Ministry has issued notifications to implement a new taxation regime on tobacco products from 1 February 2026 under the Central Excise (Amendment) Act, 2025.
• Key elements include:
  • Revival and revision of excise duty on cigarettes (earlier reduced to a nominal level under GST).
  • Enforcement of a cess on pan masala units under the Health Security and National Security Act, 2025.
  • End of the GST Compensation Cess from 1 February.
  • Revision of GST rates on tobacco products — beedis shifted to 18% (from the earlier 28% slab); other tobacco products moved to a 40% slab.
• The Ministry flagged that cigarette affordability has not declined in the past decade, contrary to global public-health guidance recommending annual real price increases through higher specific excise duties.

Relevance  

• GS-3 (Economy)
  • Taxation, GST architecture, cess vs tax, fiscal federalism, sin-tax economics, price elasticity.
• GS-2 (Health & Governance)
  • Public health policy, NCDs, regulation of harmful products, Centre–State coordination.

Conceptual Foundations 

• Indirect Taxes on Tobacco (Pre-GST vs Post-GST)
  • Pre-GST: Central excise + State VAT + surcharges.
  • Post-GST (2017): GST (12/18/28% slabs), plus GST Compensation Cess; central excise continued only on cigarettes (but reduced to a nominal level).
• Types of Tobacco Taxes
  • Specific excise → fixed per unit (effective for health policy; raises price uniformly).
  • Ad valorem tax → % of price (can be evaded via down-trading to cheaper brands).
• GST Compensation Cess (2017–2022, later extended)
  • Purpose: compensate States for revenue losses due to GST implementation.
  • Funded partly by cess on sin/luxury goods (incl. tobacco).
• Economic Rationale for “Sin Taxes”
  • Correct negative externalities (health costs, productivity loss).
  • Recommended by WHO-FCTC: regular increases in real prices; prefer specific excise.
• Price Elasticity of Demand for Tobacco
  • Low but not zero; higher among youth & low-income users → taxation is an effective control tool.

What Has Changed — Policy Moves from 1 Feb 2025

• Excise Duty on Cigarettes Raised/Restored from nominal levels to a meaningful specific levy.
• Cess on Pan Masala Units brought into force under the 2025 Act.
• GST Compensation Cess Ends from 1 February.
• Re-structuring of GST Rates on Tobacco
  • Beedis: moved to 18% category (from the now-defunct 28% slab).
  • Other tobacco products: shifted to 40% slab.
• Policy Logic Cited by Government
  • Cigarettes have become more affordable relative to income growth.
  • Aim is to align with global public-health benchmarks mandating periodic excise hikes.

Implications — Economy, Health, Governance

• Public Health
  • Likely reduction in initiation and consumption over time, especially among youth.
  • Supports NCD control, lowers long-term healthcare burden.
• Revenue & Fiscal Federalism
  • Higher excise may boost Union revenues; cessation of compensation cess changes Centre–State fiscal dynamics.
  • States may seek alternative revenue sources post-cess.
• Equity & Behavioural Effects
  • Taxes are regressive in incidence but progressive in health gains (larger benefits for poorer households).
• Industry & Supply Chain
  • Possible down-trading to cheaper/illicit products; need strong track-and-trace enforcement.
  • Beedi sector largely informal → compliance and monitoring challenges.
• Trade & Compliance
  • Risk of illicit cross-border trade → requires customs vigilance and FCTC-aligned controls.

Analytical Perspectives 

• Does tobacco taxation balance revenue and health objectives?
  • Compare specific vs ad valorem models; global lessons (WHO-FCTC, Thailand, Philippines).
• Post-GST cess withdrawal and States’ revenue space
  • Options: buoyancy via GST expansion vs targeted sin-tax rationalisation.
• Beedi sector paradox
  • High consumption, low taxation, informal labour → policy trade-offs (health vs livelihoods).

Prelims-Ready Pointers

• Excise duty on cigarettes continues outside GST (Union power).
• Compensation Cess → designed to offset States’ GST revenue losses; ends from 1 Feb 2025.
• From 1 Feb 2025:
  • Beedis → 18% GST category.
  • Other tobacco products → 40% GST slab.
• Specific excise is considered more effective for tobacco control than ad valorem taxes.

Way Forward 

• Periodic, inflation-indexed specific excise increases.
• Track-and-trace systems to curb illicit trade.
• Differential taxation aligned to harm continuum (discourage smoked forms strongly).
• Health-earmarked revenues for NCD prevention and cessation programmes.
• Support measures for workers/farmers in tobacco & beedi value chains during transition.